This budget was brought to you by Ireland’s five multinational ‘superstars’

For a few years now the warning has been the same from the Department of Finance. Ireland can’t keep relying on rising corporation tax receipts. But the revenues have just kept rising — from €4 billion in the aftermath of the financial crash to a forecast €21 billion this year.

When you compare that with total government spending of some €90 billion this year, you can see how important it is. And the doubling of corporate tax revenues over the past five years alone has given the exchequer significant room for manoeuvre through Covid-19 and into the energy crisis.

The warnings came again in this year’s budget. The department went as far as calculating what the public finances would look like if the “windfall” element of corporation tax receipts was removed, in other words the part seen as potentially transitory and vulnerable. A forecast budget surplus of government revenue over spending this year of €1 billion would turn into a deficit of €8 billion. That is the difference between a comfortable position and having to scramble to find the cash to support households.

For now, the money keeps rolling in. The odds are that the €21 billion total for this year forecast in the budget may well be beaten. Corporate tax receipts have been piling into the exchequer in recent months. The Revenue Commissioners do not generally know what is going to land until the return arrives. But the signs are that the returns for the key autumn period are really strong.

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Making sense of Budget 2023

Listen | 36:45

Now that the dust is beginning to settle on Budget 2023, it’s time to pick it all apart. With €11 billion to dish out, it was by all means “a budget day bonanza”, but will it go far enough? Will it work economically or politically and is there more to come? To discuss this and more, this week’s host Pat Leahy is joined by director of TASC Shana Cohen, economics columnist Cliff Taylor and political reporter Jack Horgan-Jones.

The Revenue, of course, never reveal who the big taxpayers are, though they have said that 10 companies account for more than half of all corporate tax receipts. So if corporate taxes account for one in every four euro of total tax receipts, then the top 10 chip in an astonishing one euro in every eight.

Even this does not give the full picture. The reality is that there are four or five really big corporate taxpayers who between them account for the bulk of the €10 billion-plus paid by the top 10 this year. Microsoft, Apple, Google and Pfizer would be among the really big players. The expansion of these “superstar” companies has provided a huge boost to jobs and economic activity — and also to tax revenues. They are now huge players in the Irish economic landscape.

Some of the tax they pay is directly related to what their tens of thousands of employees do here, some indirectly related and some reflects tax structures which these companies have set up, which have routed billions in international profits through Ireland. The benefits are flowing because all of this has been heading in the right direction for Ireland. These companies have been doing well, their profits have been increasing and they have upped investment in Ireland and brought new activities and functions here.

And, crucially, Ireland has benefited from a massive international restructuring of these firms and where they pay their taxes from 2015 on. Ironically, having been accused internationally of being a “tax haven”, the first move to international reform via the OECD in 2015 benefited Ireland. The subsequent restructurings — which cut out offshore tax havens such as the Cayman Islands and led to huge new financial investments here — meant more profit reported here.

The start of the big jump in Irish corporate tax revenues dates back to this change. But, as is typical in the opaque world of multinational cash movements, the precise reasons why Ireland has benefited to such a massive extent are not entirely clear.

Certainly, the big companies have become hugely more profitable, with Central Statistics Office data showing the profits of foreign companies based here rising by 70 per cent from €110 billion in 2016 to €189 billion in 2020 — and this trend will have continued through the pandemic. More profits means more tax. And the big players have added new functions and activities here over the period too. But still all the expert analysis is that a significant portion of the tax paid here is “unexplained” by their activities here.

The risks of relying on such a large base for such a big amount of tax are obvious — what if a world recession hits the multinational sector or particular problems affect the key pharma, medtech and technology sectors in which the big payers operate? Or if one of the big companies hits trouble in the years ahead? A Department of Finance report this year pointed to the fate of Blackberry, which went from having a market share of 21 per cent in 2009 to zero in 2016 — and to the decline of Nokia which in 2000 accounted for half of all Finnish GDP growth.

But the unexplained bit of corporate tax revenues, the part relating to tax planning, is the biggest vulnerability. What if, around a US boardroom table, a decision to change a complex tax structures now in place and large revenue disappears from Ireland overnight?

And here we see how the balance of risk and reward could get even more extreme for Ireland over the next few years. The corporate restructurings from 2015 on involved companies moving a large part of what is called their intellectual property (IP) to Ireland. So a lot of the copyrights, patents and licences which allow companies to sell in world markets outside the United States are now owned by Irish companies.

The profits directly related to this IP have been mostly sheltered from Irish tax by capital allowances — companies have effectively been able to write down the value of these massive investments of bringing these assets here over a period of years against their profits, in a similar way to if they invested in a factory.

Now, however, the question for Ireland is whether we are heading for a “doubles or quits” situation. The capital allowances on the major IP assets moved here are starting to run out. This means massive flows of income related to these will be exposed to Irish tax for the first time, and this is now starting to feed into the 2022 tax returns.

Big companies will report more income for tax in Ireland. More could lie ahead, further boosting Ireland’s stellar returns. Or the multinationals could decide to move their IP elsewhere, perhaps back to the US, in what would be a downgrading of Irish operations and a big potential cost to the exchequer.

So there is a possibility that Irish corporate tax revenues could take another jump higher over the next couple of years — alongside the ongoing risk of problems leading to a quick hit to returns, of which the building global recession is the most obvious. The uncertain progress of international tax reform also carries opportunities and threats; a hike in the corporate tax rate for big players from 12.5 per cent to 15 per cent would create new revenues.

Having been criticised by the Irish Fiscal Advisory Council (IFAC) for allowing soaring corporate taxes to cover overspending in health in the run-up to the pandemic, Minister for Finance Paschal Donohoe has persuaded Cabinet colleagues to put significant amounts of the revenue into what is called a reserve fund. Some €2 billion was put in this year and €4 billion is due to go in next year. The IFAC tweeted its approval.

The idea of the reserve fund is to prepare for a hit to corporate revenues which might still be a few years away. And to try to ensure that Ireland does not end up, as it did after the financial crisis, with the need to slash spending in an emergency fashion if the public finances take a turn for the worse.

The stakes are huge. Without the corporate tax surge, Ireland would be borrowing more to fund the big supports being put in to tackle the energy crisis, rather than paying for them out of available cash. It would, in the years ahead, mean pressure to cut spending and raise taxes quickly to close the gap in the public finances, rather than being able to put cash aside.

Over the last few years the gains have been extraordinary. Since 2015 the “frothy” element of corporate tax revenues may have contributed some €30 billion to Ireland’s national finances.

The outsize contribution of the four or five big multinationals is simultaneously a massive boost and a big risk. “You can’t leave yourself hoping you will win the lotto every year,” as one observer put it. The Department of Finance and many others have been crying wolf for years. And with the real possibility that corporate tax returns could climb further towards €25 billion in the short term, the stakes are climbing all the time.